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Home | News | Opening of the oil industry to the private sector, a necessary step for Mexico

Opening of the oil industry to the private sector, a necessary step for Mexico

On Friday, March 18, 1938, the world focused its attention on Mexico when then-President Lázaro Cárdenas declared the expropriation under which the Mexican people retook control of the country's oil wealth, which was then being exploited by foreigners. At the time, all sectors of the population expressed their support, but smear campaigns were started at the international level. Great Britain broke off relations with Mexico and tensions grew with the United States.

Now the world is looking at Mexico once again, as it has taken 77 years for private companies from around the world to be allowed to invest in the country's petroleum sector once more.

Wednesday, July 15 was an "historic" day for the Mexican oil industry and the country in general, putting an end to the decades-long monopoly of oil giant Pemex. What Mexico is currently going through is an emblematic development, since during that entire time, the possibility of opening up the industry to the private sector was practically considered taboo.

Despite the significance of the occasion, on that day 14 oil fields were tendered, of which just two were awarded to a single consortium comprising Sierra Oil & Gas, US firm Talos Energy and British company Premier Oil, thus kicking off the energy reform promoted by President Peña Nieto – a somewhat underwhelming start.

However, on September 30, the international community was able to forget its concerns about China or the Federal Reserve for a moment, thanks to the great success of the second tender of oil fields.

With this tender process, Mexico once again garnered positive attention from the media and institutional investors. The prestigious Financial Times reported that after the "failure on the first occasion, when only two of the 14 blocks on offer were awarded, Mexico recovered in the second oil auction, awarding three of the five blocks, with juicy terms for the state."

Phase 2 achieved the expected improvement thanks to the changes made by the government and the low exploration risks for the fields tendered, because while the blocks offered in Phase 1 were for exploration, those up for grabs this time were extraction blocks, increasing the probability of successfully obtaining oil.

According to these results, the government could expect investments of US$3 billion and additional production of 90,000 barrels per day until 2018. Taking into account the tax regime defined in each contract and under the law, the Mexican government will receive between 82% and 90% of the profits generated in the contracts awarded. The contracts include a progressive tax scheme, so in the event of an increase in hydrocarbon prices or if larger volumes than expected are discovered, Mexico will receive a higher percentage of the profits from the projects.

Looking ahead, we will have to be ready for Phase 3, due to be carried out in December, since it is the stage most eagerly awaited by Mexican public companies. So far it has been revealed that 59 companies have started the prequalification process for this phase, which is the most attractive set of tenders, not solely because of the lower risk, but also because they involve licensing contracts that are usually more appealing.

An increasingly competitive country

This is just the beginning, which is helping Mexico to strengthen and consolidate its position as a market for private companies around the world to invest in this sector, as well as in other industries.

This has been demonstrated over the last year, with German and South Korean companies deciding to invest in the country due to its low production costs and geographic location. Mexico is the world's fourth largest auto exporter and the eighth biggest manufacturer. In 2017 the country is expected to produce more than 4 million vehicles, consolidating itself as a world power.

The opening up of the energy sector doesn't just mean entry into a new sector, since it should also help boost the competitiveness of the manufacturing sector by reducing energy costs. Electricity prices have already fallen some 19% this year.

At present, some 20% of the Foreign Direct Investment that arrives in Mexico goes to the aerospace industry, which has seen exports rise 17% annually over the last 10 years. According to KPMG, Mexico is 13.3% more competitive in terms of costs than the United States.

This greater competitiveness shown by the country has the potential to continue driving Mexico's growth, which has also been benefitted by the recovery in consumption, growth in remittances, the positive impact of other reforms (labor, financial, telecommunications, among others) and the reactivation of the US economy.

The results of these reforms and the investments made in these sectors, particularly in manufacturing, is the positive performance that has been shown by the Mexican Stock Exchange since last year. If we compare it with the rest of Latin America and other emerging markets, thanks to the reforms that have been promoted, the Mexican capital market is enjoying upward momentum that could provide interesting investment opportunities.


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